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Bit Coin Adventures

posted Feb 3, 2013, 3:59 AM by Evan Morrison

For those who are unaware, Bit coin is the future of Internet payments. Maybe not in its current form and perhaps as some other p2p monetary system, perhaps backed by something substantial, or even some brave country or multi-national with sufficient resource assets. Either way, the traditional model of Internet payment is outmatched. As we’ve all learned over the last decade, money is not ‘easy’ anymore. Globalization of the service industries has led to a strategy of economic arbitrage for many individuals and businesses; unfortunately, at the expense of future generations. It used to be easy money to trade in a first world and maintain services in the 3rd world. Now everyone has caught on and thanks to the Internet we’re outsourcing like never before, moving the consumers income into different districts.

So what does this have to do with banking? Banking and finance have a large number of recumbent financial services such as holding, and moving assets, maintaining non-global service systems. To maintain these systems in the way that they do, costs millions and the customers are usually no better off.

Banks around the world spend large amounts maintaining legacy systems every year, I have friends still wrapping Cobol code to work with phone apps. The money that is spent, is spent on ensuring that their security is up to scratch and that their systems can provide adequate services to their customers, the biggest issue being the re-inventing of the wheel. In my experience, every bank has its own transaction API. They all work with VISA and Master Card, and in some shape or form they all apply to the VISA and Master Card product API’s in much the same way; however, all offer different service API’s to the consumers. This is their way of branding the banks services I guess. With the expenses that are involved in these large systems banks quite rightly charge service fees to ensure continued maintenance and developments, and to ‘move’ the money. In the same breathe, Visa and Master Card also charge a service fee for their system maintenance and ‘moving’ services. Looking further down the line to PayPal which has a standard API for all consumers. The PayPal API interface as a standard to Visa and Master Card, which have interfaces back to the bank again. At the current rate, by the time you offer products for sale online using PayPal, you’ve given up a 4% stake in the retail price of your service for sale.  If you start looking at international payments, there are further fees for currency conversion and transaction handling.

From my point of view from an industry that is highly globalized, there are parts of the banking system that are still playing too much at a local level. These parts of the banking system charge too much for nonstandard and often lackluster services and now they have a competitor.

Enter Bit coin, and ignoring the deeper description of what it is and how it works, and we’re given a model of either personal wallet management (like becoming your own bank), or wallet services (much like a regular bank). Interfacing through a pretty standard API, most systems are different but due to the bot community, have more similarities than the current banking industry. Finally, and most importantly, p2p transactions. It is these p2p transactions that the banks currently have the most to fear about.

The way I understand the process to work is that firstly the entire system is open for all to monitor over and that all transactions are public. So when Bob attempts to send money to person Bill, they publish the transaction and sign the transaction with a digital signature. If anyone wants to know who owns a particular coin, they can consult the public record of ownership.

This process makes sending money, very cheap. All of a sudden transfer fees, currency conversion and everything else disappears (transfer fees reappear when you take your money out of Bit coin). By itself, it is a good enough reason for those sending money overseas or those engaged heavily in e-commerce to start getting involved. Overtime though, as the user base grows and other services become more tightly linked to Bit coins, the other benefits from using Bit coin such as self-managed banks to ease fears storing cash in unstable and unregulated markets such as in Iran.

To consider the possibilities of Bit coin, it would be well worth a review of the history of the Tata group. The Tata group has its humble beginnings in 1868, as an opium trader, a legal trade of the day. Which by 1887 had become large enough to enjoy an export market in Hong Kong again, legal and becoming subject to question. Eventually as it became large enough the group moved into more legitimate industries such as steel, hotels and telecoms. Contrasting Tata’s growth against Bit coin, I believe that it is going to follow the same trajectory, initially driven by sites like the ‘Silk Road’ and handling payment processing for Wikileaks. Now as the market has become large enough, more legitimate businesses are joining the ecosystem and the system itself is evolving and becoming more stable. The Bit coin arena is changing at a rapid rate, beyond the wild west of drugs and guns and is now becoming a little more refined, less rough around the edges. And over time, as the services that exist within the system framework become better known and more widely understood. The system will start to offer real competition to the banking bread and butter and will soon become the de facto for Internet transactions. Even if it doesn’t do all that, Bit coin is a system that looks like it is going to grow and from a technical perspective is fascinating.